RBA Preview: what to expect from this month's RBA meeting

The economic data that matters:

What are the key themes to watch out of this RBA meeting?

The Covid-19 crisis and the outlook for the Australian economy

Market participants are increasingly resigned to the overwhelming likelihood that the Australian economy will enter its first recession in nearly 29 years because of the effects of the Covid-19 crisis. For markets, the matter now is what the probable depth and length of the recession is, and what the strength of the recovery will be once the Covid-19 shutdown concludes. In its latest communications to the market, the Reserve Bank of Australia (RBA) asserted the outlook is too uncertain to provide a view on the likely path for Australian economy. Any view, how direct or otherwise, given by the RBA about economic conditions, will be greatly picked apart by traders and analysts.

Future policy considerations and the chances of greater monetary support

Given the historic nature of the policy suite announced by the RBA at its emergency meeting in March, guidance regarding future policy was more or less non-existent, with the central bank wishing to emphasize the reasoning and benefits of its new tools. Given the RBA has only just begun rolling out its yield curve control program, and has yet to fully launch its term funding facility, it may stay reticent regarding future policy. The markets will be searching for some signs that the RBA remains open to a fully fledged quantitative easing program. And perhaps even more interest rate cuts, given the markets are baking-in a future cash rate of 0.10%.

How could the RBA meeting impact the financial markets?

Financial markets have arguably moved on from financial conditions and monetary policy as its primary concern when it comes the Covid-19 economic sudden stop. Greatest interest is in judging how countries, especially the US, the UK and some countries in Europe, are “flattening the curve” of the outbreak, and getting an idea for when an economic recovery will emerge and what “shape” it may take.

Nevertheless, guidance about the future will be crucial for market participants, and will likely result in movement in markets, however marginal.

Australian Dollar

In the short term, the Australian Dollar may pop higher following the meeting, given the interest rate market’s expectation of some sort of a rate cut this week. In the bigger picture, the AUD is trading as a global growth proxy, rather than on interest rate differentials. As a result, the currency will likely experience downward pressure in the medium-to-longer term, as the Australian and domestic economy likely slips towards recession in coming quarters.

ASX200

If the RBA keeps rates at 0.25%, on an intraday basis, stocks may face some small headwinds. The ASX200 will be at the whims of economic fundamentals for the foreseeable future. However, signs that the RBA remains open to further easing, especially if that takes the form of a possible QE program, which investors were disappointed not to see at the RBA’s “emergency meeting”, could provide some support for the market.